Precious Metals Stocks: The Next Quarter
Wednesday, August 26, 2009 at 05:26PM
Gold Prices in Gold, Gold Mining Companies
Gold Silver Ratio 26 August 2009.JPG
Chart courtesy of Stockcharts

As the sunny month of August draws to a close we take a look at the next few months from September to the year end. There are a myriad of factors to be considered but we will try and keep it brief.

The inflation/deflation debate continues at some pace with analysts and researchers coming down hard on both sides on the line. Our humble opinion for what it is worth is that inflation will take hold sooner or later due to the amount of financial stimulus that has been injected into the global system. The US has been particularly aggressive in this area with their low interest rates, quantitative easing et al, which now weighs heavily on the dollar. Other nations have followed in this direction though in many cases to a lesser extent.

Gold itself still appears to be inversely linked to the dollar as it eyes the $1000/oz hurdle, and the dollar looks for support at the '78' level on the dollar index, hoping to keep the lid on gold prices. As they say nothing goes down in a straight line and that holds true for the dollar, however, the dollar has been debased and we see the next stop being '76' followed by a test of support at the '72' level. During this process of the dollar weakening, gold will challenge and pass the $1000/oz hurdle. We all know that it is only a move up of fifty dollars or so but the psychological barrier will have been breached. This should become headline news and generate plenty of air play for gold and its related mining stocks. Having achieved its immediate goal a rally should ensue taking gold to much higher levels in short order. If it dithers and falls then we will need to re-evaluate the whole story for gold. By News Years Eve we will either be relieved that we were in the right place at the right time or it will be a case of back to the drawing board.

However if we may quote Jim Sinclair of JSMineset recently:

“The price of gold is all in the US dollar, nowhere else.”

The next biggest influence we see is the broader markets as equities have rallied extremely well since hitting the bottom in April when the DOW hit 6,469 before recovering to 9,535 on the 25th August 2009. If this rally keeps going and the dollar declines then one would expect the gold producing stocks to deliver very good returns. However if the broader markets sail into a bout of profit taking which is severe then gold stocks could be sold off as investors flee to the sidelines. If this happens then gold prices will need to hold up thus facilitating a rapid return to favour for the gold producers.

Assuming that gold is about to have its finest hour where should we be positioning ourselves you ask? Well to answer that we can only tell you what we do and you can it add this tiny piece of data to the pot of research that you have gathered to date to help you formulate your investment plan. We hold both physical gold and silver along with the associated mining stocks and some cash for possible opportunistic trades.

We have long held the view that silver will outperform gold and and see no reason to change this stance. Indeed there exists an aberration in the relationship between gold and silver where historically the ratio has been around the 50:1 mark. With gold at say $944.90/oz and silver at $14.25/oz the ratio is at '66' now if gold hits a $1000/oz and this aberration returns to the norm then silver should trade at $20.00/oz. This in turn would see the quality silver producers trade at more than double the prices that you can buy them for today. So our attention will now be concentrated mainly on the silver space.

Make no mistake we are talking about quality silver producers and not speculative juniors with a good story.

Have a sparkling day.

Your thoughts are of course most welcome.

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